FINANCIAL

STATEMENT
ANALYSIS
 Outline

• Users of financial statement

• The importance of financial statement analysis
• Types of analysis:
– Percentage Analysis:
• Vertical
• Horizontal

– RatioLiquidity
Analysis
•
• Profitability
• Efficiency
• Solvency
 Users of financial statement

• Managers
• Investors / Shareholders
• Potential Investors
• Creditors
• Regulatory Agencies
• Inland Revenue
• Consumers
 The importance of financial statement
analysis

• Helps interested users in making economic decisions:

–time.
Provide the trend of the business for a certain period of

–industry.
Provide comparability among companies in the same

• Helps in forecasting the business’s future performance

Financial Analysis: Comparison Basis

Company XYZ
1 intracompany basis
Year 1 Year 2

2 industry averages

3 intercompany basis
Co. A Co. C

Co. B
Co. ABC Co. XYZ
Co. D Co. E
 Types of analysis

Financial
Statement
Analysis
Percentage Ratio

 Liquidity Ratio
 Horizontal Analysis
 Profitability Ratio
 Vertical Analysis
 Efficiency Ratio

 Solvency Ratio
 Horizontal analysis

 Also known as trend analysis.

 Evaluates a series of financial statement data

over a period of time.

 Purpose: to determine the increase or decrease

that has taken place This change may be
expressed as either an amount or a percentage.
 Horizontal analysis

Income Statement
Evaluates:

Balance Sheet

Formula: Current Year Amount – Base Year Amount

Base Year Amount
 Selamat Company
Comparative Balance Sheet As At Dec. 31, 2009 and 2010

2009 2010 Inc. (Dec)

Amount %
Fixed Asset:
Office Equipment (net) 55,000 63,000 8,000 14.5
Current Asset:
Cash 7,000 9,700 2,700 38.6
Accounts Receivable 10,000 18,000 8,000 80.0
Current Liabilities:
Liabilities
Accounts Payable 9,000 7,000 (2,000) (22.2)
63,000 83,700 20,700 32.9

Owner’s Equity 63,000 83,700 20,700 32.9

63,000 83,700 20,700 32.9
Selamat Company Comparative Income Statement For the Years
Ended Dec. 31, 2009 and 2010

2009 2010 Inc. (Dec)

Amount %

Net Sales 99,000 115,000 16,000 16.2

Cost of Goods Sold 44,500 57,700 13,200 29.7

Gross Profit 54,500 57,300 2,800 5.1

Selling Expenses 16,800 15,000 (1,800) (10.7)
Admin Expenses 12,000 20,900 8,900 74.2

Net Income 25,700 21,400 (4,300) (16.7)

 Vertical Analysis

 Evaluates financial statement data expressing

each item in a financial statement as a percent
of a base amount.

 Vertical analysis enables you to compare companies

of different sizes.
 Selamat Company
Comparative Balance Sheet As At Dec. 31, 2009 and 2010

2009 2010
Amt % Amt %
Fixed Asset:
Office Equipment (net) 55,000 87.3 63,000 75.3
Current Asset:
Cash 7,000 11.1 9,700 11.6
Accounts Receivable 10,000 15.9 18,000 21.5
Current Liabilities:
Liabilities
Accounts Payable 9,000 14.3 7,000 8.4
63,000 100 83,700 100
Long Term Liabilities 30,000 47.6 45,000 53.8
Owner’s Equity 33,000 52.4 38,700 46.2
63,000 100 83,700 100
Selamat Company Comparative Income Statement For the Years
Ended Dec. 31, 2009 and 2010

2009 2010
Amt % Amt %

Net Sales 99,000 100 115,000 100

Cost of Goods Sold 44,500 45.0 57,700 50.2

Gross Profit 54,500 55.0 57,300 49.8

Selling Expenses 16,800 17.0 15,000 13.0
Admin Expenses 12,000 12.0 20,900 18.2
Net Income 25,700 26.0 21,400 18.6
 Ratio Analysis

 Expresses the relationship among selected items

of financial statement data.

 Classifications:
Liquidity Ratios

Profitability Ratios
Efficiency Ratios
Solvency Ratios
 Liquidity Ratios

Measures of short-term ability of the company to pay

its maturing obligations and to meet unexpected
needs for cash.

The ratios are:

 Current Ratio / Working capital ratio

 Acid test ratio / quick ratio

Liquidity Ratio – Current ratio / Working
capital ratio

 measure for evaluating a company’s liquidity and

short-term debt-paying ability.

Current Assets
Current ratio =
Current Liabilities
Eg: 2009 2010

Current Assets 36,500 26,700

Current Liabilities 17,200 29,600

36,500 26,700
Current ratio =
17,200 29,600

= 2.12 : 1 = 0.90 : 1
 Liquidity Ratio – Acid Test Ratio /
Quick Ratio

 is a measure of a company’s short-term liquidity.

Quick Assets
Acid test ratio =
Current Liabilities

 Quick asset includes cash, marketable securities

and accounts receivable.
Eg: 2009 2010

Quick Assets
Cash 7,900 8,700
Accounts Receivable 9,800 12,000
Inventories 2,800 6,000
20,500 26,700
Current Liabilities 17,200 29,600

Acid test ratio = 17,700 20,700

17,200 29,600

= 1.03 : 1 = 0.70 : 1
 Profitability Ratios

Measures of the income or operating success of a

company for a given period of time.

The ratios are:

 Profit margin  Return on Common Equity

 Gross profit margin  Earnings Per Share

 Return on Assets  Price - Earnings ratio

 Return on Equity
 Profitability Ratio – Profit Margin

 is a measure of the percentage of each dollar of

sales that results in net income.

Net income
Profit margin =
Net sales
Eg: 2009 2010

Net Sales 45,000 52,700

Less: Cost of Goods Sold 20,200 23,600
24,800 29,100
Less: Operating Expenses 14,200 14,600
Net income 10,600 14,500

Profit margin = 10,600 14,500

45,000 52,700

= 23.56% = 27.51%
Profitability Ratio – Gross Profit Margin

 is a measure of the percentage of each dollar of

sales that results in gross profit.

Gross Profit
Gross profit margin =
Net Sales
Eg: 2009 2010

Net Sales 45,000 52,700

Less: Cost of Goods Sold 20,200 23,600
Gross Profit 24,800 29,100
Less: Operating Expenses 14,200 14,600

Net income 10,600 14,500

Gross profit margin = 24,800 29,100

45,000 52,700

= 55.11% = 55.22%
 Profitability Ratio – Return on Assets

 To assess the ability of the company in using its

assets to earn net income without consideration in
the financing of such assets.

Net income + Interest expense

Return on assets =
Average total assets

 Average total assets = Total assets year 1 + total assets year 2

2
Eg: 2009 2010

Net income 10,600 14,500

Interest Expense 910 760
Total Assets (2000 = 69,900) 75,000 82,000

10,600 + 910
Return on Assets =
(69,900 + 75,000 ) / 2
= 15.89%
14,500 + 760

(75,000 + 82,000 ) / 2
= 19.44%
 Profitability Ratio – Return on Equity

 To assess the ability of the company in managing the

investments by shareholders to earn income.

Net income
Return on equity =
Average total stockholders’ equity

 Average total = Total equity year 1 + total equity year 2

stockholders’ equity 2
 Eg: 2009 2010

Net income 10,600 14,500

Total Equities:
Common Shares 80,000 86,000
Preference Shares 20,000 20,000
100,000 106,000

Return on Equity ( year 2002 ) = 14,500

(100,000 + 106,000 ) / 2

= 14.08%
 Profitability Ratio – Return on Common
Equity

 To assess the ability of the company in managing the

investments by common shareholders to earn its net
income.

Return on common Net income

=
equity Average common stockholders’ equity

 Average common Common equity year 1 + common equity year 2

stockholders’ equity =
2
 Eg: 2009 2010

Net income 10,600 14,500

Total Equities:
Common Shares 80,000 86,000
Preference Shares 20,000 20,000
100,000 106,000

Return on Common 14,500

=
Equity ( year 2002 )
(80,000 + 86,000 ) / 2
= 17.47%
 Profitability Ratio – Earnings Per Share

 a measure of net income earned on each share of

common stock.

Net income
Earnings Per Share =
/ EPS average common shares outstanding (unit)
Eg: 2009 2010

Net income 10,600 14,500

Total Equities:
Common Shares
(RM1.00 per share) 80,000 86,000

Earnings per share = 14,500

( year 2002 )
(80,000 + 86,000 ) / 2

= RM0.17 per share

Profitability Ratio – Price Earnings Ratio

 Measures the ratio of the market price of each

share of common stock to the earnings per share.

Price Earnings Ratio Market price of common stock

/ PE Ratio =
Earnings Per Share
 2009 2010
Eg:

Average market price for RM3.25 RM4.62

common stock
Earnings Per Share RM0.11 RM0.17

RM3.25 RM4.62
Price Earnings Ratio =
/ PE Ratio RM0.11 RM0.17

= 30 times = 27 times
 Efficiency Ratios

Measures of the efficiency and the ability of the

company in managing its resources.

The ratios are:

 Inventory Turnover

 Asset Turnover

 Debtors Turnover / Receivable Turnover

 Efficiency Ratio – Inventory Turnover

 measures the number of times, on average, the

inventory is sold during the period .

 Purpose: to measure the liquidity of the inventory.

Inventory Cost of goods sold

= Average inventory
Turnover

Opening inventory + closing inventory

 Average inventory =
2
 2009 2010
Eg:

Cost of goods sold 20,200 23,600

Inventories 2,800 6,000

23,600
Inventory turnover (2002) =
( 2,800 + 6,000 ) / 2

= 5.4 times
 Efficiency Ratio – Assets Turnover

 measures how efficiently a company uses its

assets to generate sales.

Net sales
Assets turnover =
Average total assets

Total assets year 1 + total assets year 2

 Average assets =
2
 2009 2010
Eg:

Net Sales 45,000 52,700

Total Assets 75,000 82,000

52,700
Assets turnover (2002) =
( 75,000 + 82,000 ) / 2

= 0.67 times
Efficiency Ratio – Receivables Turnover

 Used to assess the liquidity of the receivables.

 It measures the number of times, on average,

receivables are collected during the period.

Net credit sales

Receivables turnover =
Average net receivables

 Average net A. R year 1 + A. R year 2

=
receivables 2
 2009 2010
Eg:

Net Credit Sales 35,000 45,700

Accounts Receivable 9,800 12,000

Receivables turnover = 45,700

(2002) ( 9,800 + 12,000 ) / 2

= 4.2 times
 Solvency Ratios

Measures of the ability of the company to survive

over a long period of time.

The ratios are:

 Debt ratio
 Equity ratio

 Times Interest Earned

 Solvency Ratio – Debt Ratio

 measures the percentage of total assets provided

by creditors.

Total liabilities
Debt ratio =
Total assets
 2009 2010
Eg:

Total assets 75,000 82,000

Total liabilities 39,000 52,000

39,000 52,000
Debt ratio =
75,000 82,000

= 52 % = 63 %
 Solvency Ratio – Equity Ratio

 measures the percentage of total assets provided

by shareholders.

Total owner’s equity

Equity ratio = Total assets
 2009 2010
Eg:

Total assets 75,000 82,000

Total equities 69,000 69,000

69,000 69,000
Equity ratio =
75,000 82,000

= 92 % = 84 %
 Solvency Ratio – Times Interest Earned

 provides an indication of the company’s ability

to meet interest payments as they come due.

Income before tax and interest expense

Times interest earned =
Interest expense
 2009 2010
Eg:

Income before tax and interest 10,600 14,500

Interest Expense 910 760

10,600 14,500
Times interest earned =
910 760

= 11.65 times = 19.1 times